North Indian bulk tea prices may remain under pressure: ICRA

The considerable uptick in prices of orthodox tea since the beginning of this year notwithstanding, the overall prices of North Indian bulk tea may witness only a marginal increase.

According to a recent report by ICRA, prices of the orthodox variety of teas witnessed a sharp increase of around 15 per cent on healthy demand, primarily from Iran, in the first five months of FY20. However, prices of CTC tea continued to remain under pressure with those produced in the bought leaf factories witnessing a price decline of around 10 per cent, while those of tea produced in estates remaining flat.

This had an overall dampening effect on prices of tea in North India, which remained soft in the first half of FY20.

“Better orthodox tea prices would have a limited impact on the overall financial performance of the bulk tea players based out of North India, given that the orthodox variety accounts for only around 10 per cent of total production. However, organised bulk tea players who have a high proportion of orthodox teas in their overall production, would stand to benefit substantially with such price trends sustaining,” said Kaushik Das, Vice-President and Sector Head, Corporate Sector Ratings, ICRA.

Demand-supply situation

The divergent trend in prices between orthodox and CTC teas is primarily on account of the difference in the underlying demand-supply scenario of the two varieties.

While Kenya, which is primarily a CTC producer, reported a decline in crop in the seven-month period of calendar year 2019, the record production witnessed in 2018 continued to keep international CTC prices depressed during the current year. Increased availability of Kenyan tea in the global market, which is relatively cheaper than Indian CTC tea, impacted CTC export volumes from India.

In addition to this, domestic CTC prices, particularly in North India, remained soft on account of an 8 per cent increase in North Indian production so far during this year. This was driven by an 11 per cent rise in production by small growers, while production from estate factories grew by 6 per cent during the first seven months.

Though the higher production of tea in North India would lead to better absorption of costs, the overall soft price trends are likely to limit the improvement in financial performance in the current year, the ICRA report noted.

Early closure

The industry is pinning its hopes on an early closure directive to come from the Tea Board of India to curb supply of substandard teas into the system towards the end of the year.

The Tea Board had, in October 2018, directed tea gardens not to carry out plucking beyond December 10, in order to reduce the quantity of substandard teas. Tea gardens usually carry on plucking activities almost till the end of December leading to an increased supply of poor quality leaves. Such poor quality teas exert pressure on prices.

“We are hopeful that the Tea Board will look at announcing early closure of plucking this year as well. This might help suck out around 25 million kg of tea from the system, thereby helping prices to firm up,” said Vivek Goenka, Chairman, Indian Tea Association.

This year, the Tea Board might keep December 14 as the last date for plucking of green leaves for all tea factories, sources said.

However, the United Forum of Small Tea Growers’ Association, West Bengal, has urged the Tea Board to announce December 24 as the last plucking day, and the first plucking date to be on March 25. This would help alleviate part of the financial losses incurred by small tea growers since the beginning of this year due to prolonged drought and low production.

“In the main season, we had to sell our highly-perishable produce below the MBP (minimum benchmark price) announced by the Tea Board on a monthly basis. Sometimes the green leaves had to be sold even at Rs 7-8 a kg, which is far less than the cost of production,” the Association said.

The 60-day gap between the last and first day of plucking will help small tea growers go in for massive pruning, which will supply good quality green tea leaves in the market, it added.

COMMENT NOW